How do cross-border payments work?
These transactions are executed via blockchain networks, which eliminates the need to resort to banks, which often delay payments considerably.
Imagine you are in Spain but want to send funds to Africa. The first step involves turning the fiat currency into a digital asset of your choice. There are a wide range of websites and platforms that serve as an „on-ramp“, which means that purchases can be made by bank transfer and credit card.
This fiat currency can be stored in a secure wallet. When it’s time to make a transfer to your friends, they can give you their wallet address – similar to the account number you would have at a traditional bank. These addresses can contain dozens of characters, so transcribing them carefully is essential.
Once the funds have reached an account, the recipient has several options. He can either convert the crypto-currencies to fiat and withdraw them, or exchange them for a less volatile digital asset such as a stablecoin.
What are the advantages of cryptomonies over fiat money?
It is cheaper and faster… and it can also help control money laundering.
There is a lot of enthusiasm about how crypto currencies could transform cross-border payments as we know them – by making remittances, whereby workers in foreign countries send funds to their loved ones at home, in a much cheaper way.
Currently, the World Bank estimates that remittances sent through fiat channels result in average rates of 6.75%. For someone with a limited income, this can take a significant share of their earnings. Although this is less than the 9.67% charged in 2009, there is still a long way to go. In early 2010, the G8 and G20 set a target to reduce remittance costs to 5%, and the UN’s Sustainable Development Goals also set a target of 3% by 2030.
Crypto currencies could help these goals to be achieved much more quickly. According to Deloitte’s figures, blockchain has the potential to reduce transaction costs by 40 to 80 per cent. But the advantages do not end there. Currently, it can take three to five business days for funds to be cleared through old wiring networks – not ideal for someone who needs money urgently. But on certain crypto nation pro networks, payments may be confirmed in seconds.
The advantages do not end there. As Deloitte points out, blockchain transactions can be a great source of data – which means that metadata can be transmitted from one end to the other. All of this can help curb money laundering and terrorist financing, two areas of concern for regulators. Many crypto-currency platforms introduced know-your-customer (KYC) protocols in order to verify users as well.
A crucial benefit that crypto-currencies can offer is unlocking access to financial services for the unbanked. Research suggests that 80% of consumers in sub-Saharan Africa fall into this category, and worldwide, a total of 1.7 billion people do not have a bank account. There can be a multitude of reasons for this. Financial institutions may not operate in your geographic area, these services may be too expensive, or consumers may be distrustful.
How much money is sent around the world using crypto-currency?
Digital assets have a small market share in the field of cross-border payments in general, but demand is growing.
According to Juniper Research, international digital remittances are expected to rise to $525 billion by 2024 – a 102% increase from their 2019 level. This figure includes Fintech’s flat-only trading platforms.
„By using a blockcha-driven network, operators can offer their users a much faster, cheaper and more transparent service,“ the authors said.
This view is shared by BlockData, which recently revealed that blockchain-based transactions are generally 388 times faster and 127 times cheaper than traditional remittances.
This is a rapidly evolving industry and it is difficult to give an exact figure for the volume of cross-border payments made through the crypto currency system. However, Clovr’s figures showed that 15% of those sending remittances from the US in 2017 used a digital asset such as Bitcoin, making it more popular than prepaid cards, cheques and cash. When it comes to business-to-business payments made through a blockchain platform, this figure stood at $171 billion in 2019, but Juniper Research estimates that it will exceed $4.4 billion in just four years.
What are the disadvantages of using cryptosystems?
Bitcoin is often criticised for being too volatile, and some say that blockchain technology is too difficult for ordinary users to understand.
It is important to note that there is one factor that will determine whether or not cross-border payments based on crypto-currency are cheaper: the digital asset being used.
Making transfers using Bitcoin and Ether can be costly, especially during times of peak demand. Ether has been overtaken by transaction volume on multiple occasions over the years – fuelled by increased demand for collectible tokens and Decentralised Finance (DeFi). Addressing scalability issues will be critical to the wider use of crypto currencies for remittances. Ripple, which does not have a blockchain network, offers solutions designed to make cross-border payments less costly through XRP assets. Several banks are already on board, and Ripple claims to be able to process 50,000 transactions per second.
Crypto currencies will only help solve financial inclusion if those who benefit most from remittances can be educated about the workings of digital assets and have access to smartphones with internet access so that they can dispose of their funds. There is reason for optimism in this regard. As we mentioned earlier, 80% of consumers in Sub-Saharan Africa do not have bank accounts, but 91% own a mobile phone, and the adoption of smartphones is increasing. Mobile phone payments are also very popular on the continent, which means that the leap to crypt-based transactions should not cost as much.
The final challenge concerns regulation. Industry executives have warned that there is an increase in regulation of crypto-currency, as the European Union recently announced plans to comprehensively monitor the market in just four years. This does not necessarily mean that digital assets are about to be banned; in fact, many legislators have recognised that they may have advantages in reducing the costs associated with cross-border payments. Consequently, some are considering launching their own digital central bank currency (DCBC).
How can crypto currencies be stored and traded easily and securely?
Through a platform with a carefully acquired reputation for the security of digital assets.
Cryptomoney platforms are emerging that aim to make cross-border payments much less costly than many of us are used to.
One such platform is Changelly PRO. The company strongly believes that crypto currencies offer much higher levels of transparency than traditional financial institutions, and this will help instil confidence in consumers. Dozens of trading pairs are offered through the world’s largest digital assets.
The platform aims to level the playing field by offering zero deposit rates, as well as competitive rates when withdrawing funds from an account. This is combined with an easy to use and intuitive interface, and 24/7 support for users worldwide. Changelly PRO says its priority is to make the use of cryptomonies simple, and to offer cutting edge solutions that both novice and professional traders will find advantageous.
Education is another area that Changelly PRO hopes to address. To ensure that newcomers can get the most out of the service, in-depth learning materials cover everything from account creation to security.
In September, the platform launched a new iOS application for iPhones, giving users the freedom to complete transactions while on the move. This will also be useful for those who do not use a computer.
As demand for remittances is unlikely to decrease, platforms focused on crypto-currencies are likely to play a key role in getting users a fairer deal. This could help inject some much-needed competition into space, forcing traditional institutions to innovate.